Intellectual property and wealth transfers in the Trans-Pacific Partnership

31 March 2013

Author: Shiro Armstrong, ANU

The 16th round of the Trans-Pacific Partnership (TPP) negotiations concluded in Singapore recently with few reports of progress on the remaining difficult issues, which will most likely be left to the end-game of negotiations.

The 11 Asia Pacific members negotiating the TPP are attempting to set rules for economic exchange that reflect commerce in the 21st century such as intellectual property, data flows, services trade, investor–state dispute settlement and supply chain management.

Some of those ’21st century’ issues are causing unease among members, but negotiations appear to be bogged down on some traditional 20th-century trade issues as well, such as agriculture and textiles.

A rush to complete the agreement may lead to end-game compromises being traded off at the political level and result in an agreement that is either full of exclusions or include measures that are damaging to some countries.

It is increasingly unlikely that the intended October 2013 deadline will be met, making it the third year in a row that an announced deadline is not achieved. That, and Japan recently announcing it will join the TPP negotiations, might be the only recent good news for the TPP. A large agreement like this should not be rushed.

Some of the traditional trade issues that have been highly publicised are related to US market access which has yet to relax strict rules of origin for Vietnamese textiles (not allowing fabrics to be sourced from non-TPP members such as China), open up the sugar market (for which Australia is having a second go after failing in the Australia-US free trade agreement, AUSFTA) or remove border barriers to beef and dairy (which are of particular interest to New Zealand). Results of liberalising those trade barriers are well understood: Vietnamese clothing manufactures, Australian sugar exporters and Kiwi dairy and beef farmers benefit while American consumers benefit from cheaper clothing, sugar, beef and dairy, as well as a larger variety.

But not everything in the TPP will produce win–win, positive-sum outcomes for its members, and indeed, some aspects could be damaging to potential TPP members and the region more broadly. If not designed well, some parts of the TPP could be punitive for developing countries for not having developed-country institutions or standards (at this stage of development). Imposition of those standards or institutions does not necessarily mean that they are suited to the country-specific circumstances or that developing countries can leapfrog stages of development.

There is significant evidence that strengthening intellectual property (IP) rights provisions in trade agreements is negative sum and therefore globally welfare reducing. The United States and other developed countries are net exporters of IP, and so strengthened IP in the TPP will mean wealth transfers from less developed to more developed countries.

IP rights exist to give innovators incentive to innovate by protecting their right legally to collect monopoly rents on innovations for a given period. Yet there is a balance to be struck between the rights of the innovator and public welfare, since the weaker the IP rights are, the higher the potential benefits to social welfare, as the public benefits from cheaper access to that technology (a patented medicine, for example). Extending copyright or extending patent protections in trade agreements is a very different principle from lowering tariffs.

Such protections potentially involve significant welfare transfers across borders, between where innovations are generated and their international buyers or users of goods in which innovations are embodied, with unspecified (perhaps unknowable) effect on the generation of innovation.

So while the IP regime protects commercial interests, it is not clear that IP should be a priority in trade agreements and there is insufficient evidence that IP measures enhance welfare. For example, the United States is a net exporter of IP relative to Australia and so AUSFTA resulted in net wealth transfers to the United States from Australia. There is strong evidence that the IP regime in the United States is tipped too much towards the interests of firms that patent technologies and away from the socially optimal balance, and also evidence that strengthening IP protection not only fails to increase innovation but also might stifle it. A growing body of literature shows, empirically and theoretically, that strong IP protection and patent regimes help to protect incumbent producers maintain monopoly rents, thus causing less innovation, not more. Historically, patent holders have been able to hold up entire industries and there is evidence that most innovations happen outside of patent systems.

There is an effort to expand the IP privileges that US companies receive in the United States (and in some of its FTA partner countries) — including controversial features of US IP law — to the rest of the Asia Pacific region through the TPP and to lock that in as a global norm.

There is the added public policy issue that strengthened IP protection reduces access to generic medicines, both in terms of price and the time to market. There would appear little justification from a social welfare standpoint for including IP in trade agreements. It follows that any IP provisions should be subject to independent scrutiny and IP should not be included in trade agreements as a matter of course.

The TPP should be ambitious with market access issues and other areas where there is a clear-cut case of trade liberalisation leading to win–win outcomes. But member countries should be careful not to trade these wins off against measures like IP — particularly where there is little evidence that these measures will deliver good public policy.

Shiro Armstrong is a Research Fellow and Co-Editor of East Asia Forum in the Crawford School of Public Policy at the Australian National University.This piece is a shorter version of a paper prepared for the China National Committee for Pacific Economic Cooperation (CNCPEC) Seminar on TPP 2012, available here.

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Bernard K. Gordon

1st April, 2013, 8:12 am

Shiro Armstrong at a number of points in the essay says there is evidence to support the views expressed. For example, “There is significant evidence that strengthening intellectual property (IP) rights provisions in trade agreements is negative sum and therefore globally welfare reducing.” Likewise, the essay includes these statements:[there is] also evidence that strengthening IP protection not only fails to increase innovation but also might stifle it. A growing body of literature shows, empirically and theoretically, that strong IP protection and patent regimes help to protect incumbent producers maintain monopoly rents, thus causing less innovation, not more. Historically, patent holders have been able to hold up entire industries and there is evidence that most innovations happen outside of patent systems.” It would be very helpful if this “available evidence” were cited, and while it is true, of course, that in the specific context of the TPP, much discussion has charged that medicines will be either unavailable or priced too high for developing nations, the US Trade Representative (D. Marantis) two years ago took concrete steps to avoid that outcome. More broadly, Shiro Armstrong makes a number of assertions about IP that seemed aimed to exclude that category from the TPP. In that broader context it should also be noted that Japan, as well as Singapore, are today significant beneficiaries of IP protections, and Armstrong’s suggestion to exclude it from TPP would hardly be in their interest.

The evidence I cite is actually hyperlinked in the text you quote from my piece. They are papers from the Journal of Economic Perspectives, NBER and a working paper version of an American Economic Review paper (for those without online access).

I’d note that Singapore and Japan aren’t exactly developing countries and although I didn’t go into it in my paper or post, it should be clear from those links that imposing IPR protections of the scope and degree of the US regime on those advanced countries would be problematic too.

Dear Shiro: First, thanks for reminding me of the pieces you referenced. I’ve now seen them (2 in particular), and that reading tells me we are approaching the TPP issue from two different perspectives. The authors you cite are concerned mainly with the impact of patent (and possibly by implication copyright) protection on INNOVATION. Fair enough. My concern however has been with the trade and related ECONOMIC issues the TPP reflects, and for which it was established. Perhaps you saw my article in last year’s (2012) July/August issue of FOREIGN AFFAIRS. I wrote there that a concern of the TPP negotiators was to protect the economic interests of U.S. (and other innovators). That’s why I pointed out (p.20) that “Intellectual Property is already a major source of value for the United States; in 2010, for example, 40 percent of worldwide payments made to intellectual property holders–nearly $100 billion–went to Americans….those sums matched the profits earned from the export of aircraft, grain, and business services, three sectors that lead the U.S. trade surplus.” In the next paragraph I added that “The United States is hardly the only nation affiliated with the TPP that has an interest in securing copyright and patent protections for its citizens. In 2008, for example, Japan led the world in patent applications. And Singapore, with its multibillion-dollar biotechnology investments, also needs to protect its homegrown efforts.”

The TPP is a trade program, designed to benefit the principally material concerns of its participants. Your concern with welfare, and whether IP promotes further innovation, are different matters and these are no doubt legitimate concerns but they are different ones. There is plenty of room for a discussion of these differences, but once again, my focus is with the TPP as a mainly economic effort. Regards! BKG

I’m not sure how consumer welfare and the incentive to innovate are not considered economic issues in your book. Putting particular business interests ahead of other public interests should not be the principle material concern of TPP participants or for that matter successful trade negotiation.

It may be the case that both theories and empirical studies can show pervasive and/or inconclusive results that would make the policy issue difficult to follow. It is understandable that there needs some protection for IP because with no protection, there is little or no incentive for commercial research, innovation and invention which involves costs. However, how much protection is needed to be optimal is anther issue. It seems a time period is one of the ingredients of IP protection. But there should be other dimensions, such as a total amount although this is likely to be a case dependent, given the costs of each case are different. The total amount or maximum amount should be linked to costs to allow a objectively set reasonable rents be extracted to maintain enough incentives but also allow other benefits to be realised.

There is no mention of mechanisms that handle trade disputes which is critically important the perception of sovereign laws being superseded by bilateral agreements needs to be addressed, Japan’s entry into the TPP will test the level of compromise in the US agriculture sector, the political implications both in Japan and the US domestically has vaguely been mentioned in all the op-eds I’ve read , if Prime Minister Abe is using the TPP to shore up his economic credentials at home to address Japan’s ailing agricultural sector, according to Peter Drysdale’s essay (What sort of partnership across the Pacific brings benefit?) , the net return is almost zero, why would Abe take this political risk?. This is on top of exclusion of any labour chapter which has infuriated labour unions in New Zealand and Australia, for developing countries like Vietnam with no established labour movements opens them up to exploitation if not already and people living on less than two dollars a day how would the IP regime affect affordable medicine? , and why has China been left out of the TPP?

There is a fair amount of discussion in different arenas about the possible difference between ‘invention’ (the creation of new knowledge) and ‘innovation’ (applying new knowledge in useful, especially commercially valuable, ways). That is, saying inventors invent, and entrepreneurs innovate. It might also be argued that perceptions of the value of invention per se versus value adding to invention by entrepreneurs differ across different cultures, and provide some of the rationale for infringement, at least in its own cultural context. (On this note, it is interesting that many of the mainstream entrepreneurial heroes of the developed world were not inventors, but innovated with new business models and products, creating vast new markets for what might have been otherwise minor inventions). Another area where this has impact is the difficulty of translating much of the research being carried out under government funding in the more advanced Asian economies where licensing terms and conditions are based on the perception that it is the invention that carries the value, and not the innovation in development, marketing, business models etc and which may be an impediment to commercialization to the degree it removes incentives to the entrepreneur/innovator.